4. The DIRTI-5

When developing a cost analysis for a new enterprise of farm, consider the true cost of the equipment. These costs are often referred to as the DIRTI-5: Depreciation, Interest, Repairs, Taxes and Insurance.

The initial price of a piece of equipment will provide you with an estimated impact to cash flow-when and how much the monthly payment will be for example.  However, a more accurate picture of the true cost of the equipment can be obtained by spreading the cost out over the useful life of equipment.

For example, a tractor may have an initial cost of $30,000. If the tractor has a useful life of 10 years and a resale value after 10 years of use of $10000, then the true depreciation cost would be $2000 per year. Add in interest, repairs, taxes, and insurance, and the true cost will more likely be $3000 to $4000 per year, plus operating expenses (fuel, oil, maintenance) of around $10 per operating hour.